Environments of Compensation and Benefits Administration

The Budget

Economic conditions place limits on organizations, but these limits vary among organizations and over time. An organization's compensation and benefit levels have maximum and minimum limits that are set by its position in the labor market. The organization cannot go below the minimum and retain enough employees to meet organization goals, and it cannot exceed the maximum for budgetary reasons.

These limits usually are not clearly defined, unless the organization believes it is close to either limit and in danger of being pushed beyond it. Further, these limits depend on the period under consideration. The organization can exceed either limit for short periods.

Different forces determine the maximum and minimum levels, and there is not necessarily a connection between them.

Maximum. The maximum is set by conditions in product markets and the organization's ability to operate within them in terms of costs and prices.

Minimum. The minimum is determined by conditions in labor markets, which result in part from supply and demand for labor and from customary relationships, legal pressures, union pressures and pressures from other organizations.

Competitors

Other organizations affect employer pay decisions in two directions. Some organizations in the community may exert downward pressure by paying below market rates. Other organizations in the industry may exert upward pressure on compensation by paying above average wages in order to attract employees. For example, the decision to maintain a company headquarters in the Silicon Valley in Northern California comes with some of the highest compensation levels in the country as well as a very competitive marketplace.